Hubbell v. Commissioner of Internal Revenue

• Decision Date: 02 July 1945
• Docket Number: 9949.,No. 9948,9948
• Citation: 150 F.2d 516
• Parties: HUBBELL v. COMMISSIONER OF INTERNAL REVENUE. WILDERMUTH v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

150 F.2d 516 (1945)

HUBBELL v. COMMISSIONER OF INTERNAL REVENUE.

WILDERMUTH v. SAME.

Nos. 9948, 9949.

Circuit Court of Appeals, Sixth Circuit.

July 2, 1945.

James I. Boulger, of Columbus, Ohio, for petitioners.

Paul F. Mickey, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, J. Louis Monarch, and Paul F. Mickey, all of Washington, D. C., on the brief), for respondent.

Before SIMONS, ALLEN, and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

These consolidated proceedings, arising out of the same subject matter, present corresponding petitions filed by D. D. Hubbell and Elias F. Wildermuth, respectively, to review decisions of the tax court determining deficiencies in income tax for the year 1941, assessed against the petitioners in the respective amounts of $10,606.03 and $4,527.81. Section 165 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 165 note, and Section 22(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. Int.Rev. Code, § 22(a), are the pertinent Acts of Congress involved.

Findings of Fact by the Tax Court

The findings of fact of the tax court set forth in detail the transactions with which we are concerned. The administrative tribunal found that during the year 1936, the White-Haines Optical Company, hereinafter called the optical company, was contemplating the purchase of annuities for both petitioners. Since the optical company had not reached a decision by October 1936, petitioner Hubbell, on October 2, 1936, made application to the Prudential Insurance Company of America for an annuity policy on his own life with payments of annuities to him commencing at his 70th birthday. The policy was to be issued for 40 premium units, calling for annual premiums of $4,000. In his application, petitioner named his daughter as the person entitled to receive death benefits.

Hubbell was president, treasurer and general manager of the optical company and had been associated with that company since 1901. Petitioner Wildermuth was secretary and sales manager of the optical company and had been employed by it since 1913. The only other officer of the optical company was a vice-president.

The optical company was controlled by the Bausch & Lomb Optical Company which owned 59 percent of its outstanding stock. Hubbell owned 8 percent and Wildermuth owned 2.3 percent of the stock. Hubbell, Wildermuth, Ballard, Haines, and two representatives of the Bausch & Lomb Optical Company comprised the board of directors of the company.

At a meeting of the directors of the White-Haines Optical Company on December 4, 1936, a resolution was adopted, authorizing the proper officers of the company to purchase premium refund annuity contracts for Hubbell and Wildermuth.¹

Pursuant to this resolution, the optical company, on January 2, 1937, took over the policy previously secured by Hubbell, increasing the policy to 50 premium units with an annual premium of $5,000. The $4,000 previously paid by Hubbell to the Prudential Company was returned to him by that company and the optical company paid the Prudential Company the new policy premium of $5,000. On February 4, 1937, pursuant to the application of the optical company, an annuity policy was issued by the Prudential Insurance Company of America, payable to Wildermuth as the annuitant. The policy provided for 30 premium units with an annual premium of $3,000, and the annuity payments were to begin when Wildermuth reached the age of 70 years. Both policies contained the provisions set out in Footnote 2.²

Both policies were thus endorsed:

"The White Haines Optical Company may not withdraw this policy or be the death beneficiary or be entitled to receive any refunder of premiums.

"Elias F. Wildermuth or Daniel D. Hubbell may not withdraw any cash surrender value while in the employ of The White Haines Optical Company. Henry S. Ballard is the attorney to consult if legal counsel is advisable."

Pursuant to the resolution of December 4, 1936, two separate trust agreements were executed on December 23, 1936, by and between the optical company as settlor and the Ohio National Bank of Columbus as trustee, in which the petitioners were the respective beneficiaries. The agreements were executed in behalf of the optical company by Hubbell as president, with Wildermuth as secretary. The agreements, which were identical except for the name of the beneficiary and the amount of annual premium, recited that the optical company desired to provide a pension fund for each beneficiary and to that end had purchased an annuity contract for each beneficiary maturing when the beneficiary reached the age of 70 years. Under the agreements, the optical company transferred all right, title, and interest in the annuity contracts to the trustee. The trustee agreed to hold the contracts and use its best efforts to collect all sums payable thereunder. The trustee was not required to present a claim to the insurance company until notified in writing by the optical company or the trust beneficiary and was not required to take legal steps to collect any claims until indemnified. If the contracts matured during the lives of the beneficiaries, the trustee was to receive the monthly payments from the insurance company and remit such amounts, less its commission, to the beneficiaries within five days of receipt of such payments. In the event of the death of a beneficiary, the trustee was to remit any payments under the contracts to such persons as the beneficiary had designated in his lifetime. The trustee was not required to pay any premiums to keep the contracts in force and it was particularly charged not to permit the beneficiaries to withdraw any of the cash value of the contracts while such beneficiary was employed by the optical company. It was further provided that the optical company was not to be a beneficiary of any payment under the contracts nor was it entitled to receive any payments by way of a refunder of premiums. If the company should discontinue the payment of premiums, the annuity contracts were to be held in the reduced proportions provided therein and the trusts were to continue to operate in the same manner as if the optical company had continued such premium payments.

On December 13, 1938, the board of directors of the optical company adopted a resolution authorizing the treasurer to discontinue payments on the annuity contracts for the benefit of petitioners and in lieu thereof a $2500 bonus was paid to Hubbell, and a $1500 bonus was paid to Wildermuth. On December 18, 1939, the optical company adopted a resolution authorizing payment of a bonus to Hubbell in the amount of $5,000 and to Wildermuth in the amount of $3,000. During each of the years 1938 and 1939, the optical company did not pay the premiums specified in the two annuity contracts. During the years 1936 to 1941, inclusive, Hubbell and Wildermuth received annual salaries of $20,000 and $12,000, respectively, exclusive of bonuses.

On December 5, 1940, the board of directors adopted a resolution to the effect that the annuity contracts should be reinstated and the current payments paid. It was decided that the insurance company be asked to make a loan upon the annuity contracts in the aggregate amount sufficient to pay the lapsed premiums thereon. The insurance company refused to make the loans as desired by the optical company and thereafter, during the year 1941, the optical company paid the insurance company the back premiums and the current premiums in the aggregate sum of approximately $25,000.

On August 14, 1941, a supplemental trust agreement was entered into between the optical company and The Ohio National Bank of Columbus, as trustee in connection with the Hubbell trust. This agreement recited that by reason of an error on the part of the insurance broker the application for the Hubbell annuity contract had been filed on a personal rather than on a corporate application form; and that, as a result of the error, the annuity contract appeared to have been owned by Hubbell prior to its assignment to the trustee, when in fact the optical company owned the contract prior to the assignment. The agreement further recited that to correct the error, Hubbell, on July 8, 1941, had assigned the contract to the optical company, which, in turn, on the same date, had assigned the contract to The Ohio National Bank of Columbus, as trustee. The agreement provided that the trustee should hold the annuity contract under the terms of the trust agreement of December 23, 1936. On December 10, 1941, the board of directors adopted a resolution that it had never been the intention of the optical company to allow the annuity contracts to lapse but that the real intent was merely to defer the payment of premiums on the contracts until the company was in a better cash position.

On February 4, 1942, the optical company decided to discontinue the annual payments on the annuity contracts. Accordingly, the annuity contract on the life of Wildermuth was converted into a paid-up annuity policy providing for an annuity of $2,122.44, payable in equal monthly installments of $176.87, beginning February 4, 1957. This policy contains an endorsement relating to provisions as to ownership of the policy.³

On February 7, 1942, the annuity contract on the life of Hubbell was likewise converted into a paid-up annuity policy providing for an annuity of $3,419.40, payable $248.95 monthly, beginning October 7, 1953.

During the taxable year, the optical company employed approximately 350 persons. To the date of the hearing in this proceeding, it had never established employees' trusts for any of its employees, other than petitioners, nor had it ever provided any plan or program for the formation of such employees' trusts.

In the opinion of the tax court, it was stated at the outset that the issue presented is whether the amounts paid during the taxable year by the White-Haines Optical Company, for premiums upon annuity contracts on...